Review of Financial Statement Preparation, Analysis result in an outflow from the entity of resources

and Interpretation embodying economic benefits.

Points of Discussion Equity – is the residual interest in the assets of the entity
after deducting all its liabilities.
Purpose of Financial Statements
Accounting Equation
Statement of Financial Position
Assets = Liabilities + Owners’ Equity
Statement of Comprehensive Income
Sample Statement of Financial Position
Statement of Changes in Equity
Statement of Comprehensive Income
Statement of Cash Flows
Shows the results of a company’s operations over a
Users of Financial Statements
period of time.
Financial Statements Analysis and Interpretation
What goods were sold or services performed that
International Accounting Standards (IAS) 1 – provided revenue for the company?
Presentation of Financial Statements
What costs were incurred in normal operations to
defined Financial Statements as structured representation generate these revenues?
of the financial position and financial performance of an
What are the earnings or company profit?
entity. The objective of financial statements is to provide
information about the financial position, financial Revenues
performance and cash flows of an entity that is useful to
Assets (cash or AR) created through business operations
wide range of users in making economic decisions.
Expenses
Financial Statements
Assets (cash or AP) consumed through business
Financial Statements answer basic questions including:
operations
What is the company’s current financial status?
Net Income or (Net Loss)
What was the company’s operating results for the
Revenues - Expenses
period?
The Example Company
How did the company obtain and use cash during the
period? Statement of Comprehensive Income
A complete set of Financial Statement comprises For the Years Ended December 31, 2021 and 2020
 Statement of Financial Position 2021 2020
 Statement of Comprehensive Income Revenues:
 Statement of Changes in Equity Sales P 100 P 85
 Statement of Cash Flows Other revenue 30 15
Statement of Financial Position Total revenues 130 100
Summary of the financial position of a company at a Expenses:
particular date
Cost of goods sold 62 58
Assets are those resources controlled by the entity as a
result of past events and from which future economic Operating & admin. 16 12
benefits are expected to flow to the entity. Income tax 20 18
Liabilities – are present obligation of the entity arising Total expenses 98 88
from past events, the settlement of which is expected to
Net Income P 32 P 12 Financing activities – Transactions and events whereby
resources and obtained from, or
Statement of Changes in Equity
repaid to, owners and creditors.
Statement of Cash Flows
Operating Activities
Cash Inflow
Sale of goods or
services
Sale of investments
in trading securities
Interest revenue
Dividend revenue
Cash Outflow
Reports the amount of cash collected and paid out by a
company in operating, investing and financing activities Inventory payments
for a period of time. Interest payments
How did the company receive cash? Wages
How did the company use its cash? Utilities, rent
Complementary to the income statement. Taxes
Indicates ability of a company to generate income in the Investing Activities
future.
Cash Inflow
Statement of Cash Flows
Sale of plant assets
Cash inflows
Sale of securities, other than trading securities
Sell goods or services
Collection of principal on loans
Sell other assets or by borrowing
Cash Outflow
Receive cash from investments by owners
Purchase of plant assets
Cash outflows
Purchase of securities, other than trading securities
Pay operating expenses
Making of loans to other entities
Expand operations, repay loans
Financing Activities
Pay owners a return on investment
Cash Inflow
Classification of Cash Flows
Issuance of own stock
Operating activities – Transactions and events that
enter into the determination of net income. Borrowing

Investing activities – Transactions and events that Cash Outflow

involve the purchase and sale of securities, property,
Dividend payments
plant, equipment, and other assets not generally held for
resale, and the making and collecting of loans. Repaying principal on borrowing
Treasury stock purchase
Statement of Cash Flows
Notes to the Financial Statements Determine whether an entity can be able to pay for
current liabilities as they become due with the use of
Four general types of notes:
current assets.
 Summary of significant accounting policies:
 Current Ratio
assumptions and estimates.
 Quick Asset Ratio
 Additional information about the summary
Current Ratio
totals.
measures the ability of the business to pay its short-term
 Disclosure of important information that is not
obligations as they fall due. It answers the question: Can
recognized in the financial statements.
the company pay for their current liabilities?
 Supplementary information required by the
Quick Ratio
FASB or the SEC.
otherwise known as acid test ratio, measures immediate
Purpose of Analysis
liquidity with the ability to pay current liabilities with
Internal Users the most liquid assets. It answers the question: Can the
company pay for their current liabilities with quick
Managers assets?
Officers Solvency Ratios
Internal Auditors Determine whether an entity has more ownership rather
External Users than debts. It is also called leverage ratios. These ratios
involve comparison of debt, asset, equity and interest.
Shareholders
 Debt Ratio
Lenders  Equity Ratio
Customers  Times Interest Earned Ratio
 Debt Ratio
Building Blocks of Analysis
otherwise known as the debt to assets ratio, measures
Tools of Analysis business liabilities as a percentage of total assets. It
Horizontal Analysis answers the question: How much of the assets are
finance by debt?
Comparing a company’s financial condition and
performance across time. Equity Ratio

Tools of Analysis measures the percentage of total assets financed by the

owner’s investment. It answers the question: How much
Vertical Analysis of the assets are invested by the owner?
Comparing a company’s financial condition and Times Interest Earned Ratio
performance to a base amount.
measures the company’s ability to pay the interest
Tools of Analysis charged to the company for its outstanding balance. It
answers the question: How many times can an entity pay
Ratio Analysis
for interest expense with their operating income?
is a qualitative analysis technique applied by an entity to
Efficiency Ratios
be able to assess the company’s liquidity, solvency,
profitability, and operational efficiency through Measure how well does an entity utilizes their assets and
scrutiny of account balances reported in the balance resources to generate income.
sheet and income statement.
 Asset Turnover Ratio
Liquidity Ratios  Inventory Turnover Ratio
 Accounts Receivable Turnover Ratio
Asset Turnover Ratio otherwise called Return on Investment, measures the
company’s efficiency in using its level of investment in
measures the efficiency of a company’s assets in
assets in order to generate income. It answers the
generating revenue or sale. It answer the question: How
question: How much income was “returned” in the usage
many times can an entity generate sales with their total
of assets to generate profit?
asset resources?
Return on Equity
Inventory Turnover Ratio
measures the company’s efficiency in using its equity in
measures the number of times a company’s inventory is
order to generate income. It answers the question: How
sold and replaced during the year. It answer the question:
much was “returned” in usage of equity to generate
How many times can an entity sell their inventories and
profit?
have it replaced within a period?
Accounts Receivable Turnover Ratio
measures the number of times a company’s inventory is
sold and replaced during the year. It answer the question:
How many times can an entity sell their inventories and
have it replaced within a period?
Profitability Ratios
Measure how well does an entity generate income that
relates to revenues, operating costs, assets, and capital. Financial Planning Tools and Concepts
 Gross Profit Ratio Planning
 Operating Profit Margin
Is an important aspect of the firm’s operations because it
 Net Profit Margin
provides road maps for guiding, coordinating, and
 Return on Assets
controlling the firm’s actions to achieve its objectives.
 Return on Equity
(Gitman and Zuller, 2012)
Gross Profit Margin
 Different types of planning
otherwise called Gross Margin Ratio, measures the
 Financial planning refers to the process of
percentage of peso sales earned after deducting costs of
determining the best uses of the financial
goods sales. It answers the question: How much gross
resources of an organization to attain its
profit does the company makes after considering cost of
predetermined objectives, and the procurement
goods that were sold?
of the required funds at the least cost.
Operating Profit Margin
 Corporate Planning is defined as a formal and
otherwise called Gross Margin Ratio, measures the systematic managerial process, organized by
percentage of peso sales earned after deducting costs of responsibility, time and information, to ensure
goods sales. It answers the question: How much gross that operational planning, project planning, and
profit does the company makes after considering cost of strategic planning are carried out regularly to
goods that were sold? enable top management to direct and control the
future of the enterprise.
Net Profit Margin
 Strategic Planning is the process of making
otherwise known as Return on Sales, measures the decisions which will tend to optimize the
percentage of net income earned from net sales after all organization’s future position despite changes in
income has been added and all operating expenses and future environment.
other expenses has been paid. It answers the question:
How much net income does the company make after  Project planning or capital expenditure planning
considering all income and expenses? refers to working out the execution of an action
outside the scope of current operations such as
Return on Assets
 acquisition of another company, a new plant, a
new market, or adoption of a new system.
 Operational Planning refers to a forward
planning of existing operations
The financial planning process
 Where are we now?
This requires analysis of the current financial statements
of a company. This is done to detect areas of strengths
and weaknesses as indicated by the measures of liquidity
or short-term solvency, profitability, and stability.
 How did we get there?
This requires an interpretation of historical data
which may reveal the causes of current financial stability
or difficulty such as sufficiency or insufficiency of fund
inflows from operations, inability to plough back
earnings by declaring the greater portion annual net
income as dividends, and unprofitable operations of
some sub-units.
 Where do we want to go?
The different alternatives are evaluated, and the
best choice is made considering the projected outcomes.
Budgeting
Master budget
Is the process where an entity translates their operations
in quantitative terms, usually monetary, to represent it as Is regarded as a comprehensive financial
its planned operations, activities, and production for a planning tool that highlights operating
specific time period consideration. budgets, budgeted financial statements, and
a financial plan.
 Objectives of budgeting
1. A budget should be able to provide a realistic Operating budget
estimate of income and expenses. Is a budget plan dedicated to the operations
2. A budget should provide a coordinated plan of of the entity such as sales, production, and
action for the entity. operating expenses.

3. A budget should serve as a control mechanism  Sales Budget

that can be used in performance evaluation by
 Production Budget
being able to check results and suggest future
corrective actions.  Purchases Budget
4. A budget should provide guidance to  Direct Labor Budget
management.
 Overhead Budget
5. A budget should help in decision-making.
 Cost of Sales Budget
6. A budget should be able to improve
communication, coordination, and harmonious  Operating Expenses Budget
operations within the entity.
Financial budget
Budgeting helps in
Is a budget plan dedicated to the entity’s
performance cash budget, budgeted financial statements,
planning evaluation
and capital acquisitions.